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The Reserve Bank of India needs to take a second look at the ownership guidelines for the country’s private sector banks, with multiple – and sometimes ambiguous rules – placing serious restrictions on the expansion of domestically-grown large financial institutions, swadeshi think-tank, Centre for Economic Policy Research (CEPR), said in a recent paper.
The ‘On Tap Licensing Guidelines’, issued in August 2016, had for its objectives that “such a policy would increase the level of competition and bring new ideas in the system”. However, these guidelines had elaborate prescriptions on ownership, including multi-layering, to ensure control on “ownership”, the paper said.
According to RBI rules, promoters of private sector banks are required to dilute their shareholding to 15 per cent within 15 years of beginning operations. The rule aims to diversify the ownership and prevent concentration of power, thus leading to better governance.
Even as governance restrictions and regulations are strictly followed, India must not mistakenly train its guns on the issue – by killing entrepreneurship that is aligned with its domestic and global ambitions, the paper contends.
The paper said the complex rules have resulted in lack of interest among Indian institutions to set up new banks. Therefore, even after nearly two years having gone by since announcement of the on-tap guidelines, no institution has ventured to set up a bank, it pointed out.
The CEPR paper said that such shareholding dilution ends up with the foreign investors who are now the majority owners of Indian private sector banks. Four of the five top private banks in India are majority foreign-owned, it pointed out. The CEPR paper said that in the interest of creating large Indian private banks, the RBI should put its circular on dilution of owner’s equity stake in private banks on hold and set up a committee to take a relook at issues surrounding economic ownership.
The RBI should refrain from aggravating the situation further by pushing for massive dilution by promoters to as low as 15 per cent. Instead, it seeks a higher limit of 26 per cent in sync with the voting cap.
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